What is the Definition of Stock Market
Stock market definition: It refers to the collection of markets and exchanges where the regular activities of buying, selling and issuance of shares of publicly held companies take place. Such financial activities are conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces which operate under the defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities.
While both the terms – stock market and stock exchange – are used interchangeably, the former term is a general superset of the latter. If one says that he trades in the stock market, it means that he buys and sells shares/equity on one (or more) of the stock exchange(s) that are part of the overall stock market. Leading stock exchanges of the U.S. include the New York Stock Exchange (NYSE), Nasdaq, BATS and Chicago Board Options Exchange (CBOE). These leading national exchanges, along with several other exchanges operating in the country, form the stock market of the U.S.
Though it is called stock market or equity market and is primarily known for trading stocks/equities, other financial securities – like exchange traded funds (ETF), corporate bonds and derivatives based on stocks, commodities, currencies and bonds – are also traded on the stock markets.
Explaining Stock Market
While today it is possible to purchase almost everything online, there is usually a designated market for every commodity. For instance, people drive to city outskirts and farmlands to purchase Christmas trees, visit the local timber market to purchase wood and other necessary material for home furniture, and go to stores like Walmart for their regular grocery supplies.
Such dedicated markets serve as a platform where numerous buyers and sellers meet, interact and transact. Since the number of market participants is huge, one is assured of fair price. For example, if there is only one seller of Christmas trees in the entire city, he will have the liberty to charge any price he pleases as the buyers won’t have anywhere else to go. If the number of tree sellers is large in a common marketplace, they will have to compete against each other to attract buyers. The buyers will be spoilt for choice with low- or optimum-pricing making it a fair market with price transparency. Even while shopping online, buyers compare prices offered by different sellers on the same shopping portal or across different portals to get the best deals, forcing the various online sellers to offer the best price.
A stock market is a similar designated market for trading various kinds of securities in a controlled, secure and managed environment. Since it brings together hundreds of thousands of market participants who wish to buy and sell shares, it ensures fair pricing practices and transparency in transactions. While earlier stock markets used to issue and deal in paper-based physical share certificates, the modern day computer-aided stock markets operate electronically.
It is usually known as secondary market which enable its user to buy stocks. As compared to primary markets which enable corporations to raise capital by issuing shares of common stock or bonds. The different types of primary market transactions that a corporation can engage in include public issue, rights issue, and private placement.
How stock price is determined
Stock price is the price which is automatically determined by supply and demand forces in the market for the share of a listed company. This share price is a direct reflection of the value of the listed company. It means how much public is willing to pay for a share in that company. Stock price is subject to rise and fall on the basis of different factors including global landscape, company related factors, investor sentiment, interest rates, politics, current events, natural calamities, and exchange rates. Berkshire Hathaway Inc. (BRK.A) is a stock with highest price on U.S. stock exchanges. It’s stock price is $348. Company’s value and share price must be analyzed using fundamentals before you make your decision “What stock to buy today“.
Therefore, you must prepare some investment strategies as these strategies help investors chose where and how to invest as per their expected return, risk appetite, corpus amount, long-term, short-term holdings, retirement age, choice of industry, etc. You have to make decision between investing in stocks or go for exchange-traded fund (ETF). Individual stocks can be rewarding, but they can present some downside risk for your portfolio, too.
Make money from stocks
Investment in stocks has more risk attached than other investments, but it also have the potential to reap higher rewards. Investment in stock earns money in two main ways:
- First, if the price of the stock goes up, it will give you more than you paid for it.
- Secondly, through dividends. Dividends are regular payments to holders of common stock.